Lumpy Information Disclosure and Stock Return Synchronicity: Evidence from ADR Listings

A growing literature is using stock return synchronicity, or the R2 from a market model regression,as an inverse measure of the extent to which firm-specific information is reflected in stock prices. Inthis paper, we argue that the relationship between R2 and the informativeness of stock prices is morecomplicated than has been assumed. In efficient markets, stock prices should be informative aboutfuture events: consequently, more informative stock prices should be associated with less “surprise”,and hence less idiosyncratic return variation and higher R2. In the framework of Jin and Myers (2005),we show that the relation between greater transparency and R2 is, in general, ambiguous. In particular,R2 can increase if transparency improves. This effect is most evident, but not limited to, the case oflumpy disclosure of information: our model predicts that if the disclosure is sufficiently lumpy, in thesense that the market receives a big chunk of information which otherwise might have been disclosedlater or not at all, the R2 will increase subsequently. The cross listing of American Depository Receipts(ADR) reflects such an improvement in the firm-level information environment. We test our model’simplications by examining the behavior of R2 subsequent to the ADR listings. We find that there is adynamic pattern in the behavior of R2 around the cross-listing: R2 decreases before the listing inresponse to information disclosure and subsequently increases....